Earlier this year, MARPA joined with other trade associations to express support for H.R. 636, the America’s Small Business Tax Relief Act of 2015, sponsored by Rep. Pat Tiberi.
The legislation seeks to make permanent the higher thresholds for section 179 expensing. This is the tax law that allows a small business to treat certain capital investment as expenses (which means that it can be fully deducted in the year of the expense, instead of depreciating it over a period of years). It started at just $25,000 and over the years, has been ‘temporarily’ extended on a recurring basis at increasingly higher levels (it has been set annually at $500,000 since 2010).
Industry has come to rely on this expensing provision in order to immediately deduct investments in equipment like production equipment and test equipment. This allows small manufacturing companies to better invest in modern production and test equipment.
This issue was discussed at the Annual Conference in October.
The section 179 expensing provision has been an important tax issue for many years. Because it has been around for many years, many manufacturing companies rely on the deduction provision as the basis for their own investment decisions.
The section 179 expensing provision has not yet been extended for 2015. This means that your 2015 limits on section 179 expensing are $25,000 (not $500,000) and the ability to use the provision begins to phase-out when the business invests $200,000 and fully phases out at $225,000. If it were extended as proposed, then it would apply to up to $500,000 in equipment investment, and would not phase out until the annual investment amount exceeded $2,000,000.
There is a very good chance that permanent Section 179 expensing at $500,000 could be included in the year-end tax extenders package, which Congress expects to debate and pass very soon. This would be a huge victory for small businesses, and the culmination of a lot of work by many trade associations and lobbyists to raise the profile of this issue and get it addressed by Congress.
If this is an important issue to your business, then you may wish to send letters or emails to your own members of Congress (House and Senate) expressing your opinion on the permanent extension of Section 179 expensing at $500,000.
Don’t forget that the 2013 MARPA Winter Meeting will be held in Washington, DC on February 12, 2013.
Expected speakers include:
Our topics for discussion will likely include PMA developments, streamlined PMA for non-safety-sensitive (NSS) parts, Instructions for continued airworthiness, air carrier needs, and tax laws and regulations with a particular affect on PMA parts manufacturers. In addition to our speakers, we will be discussing our government affairs program and strategic planning for the Association.
The Winter meeting is an intimate opportunity to work closely with the Association and the Board on topics of special interest to MARPA members.
If you would like to attend the meeting, please RSVP to MARPA at (202) 628-6777. There is no charge for registering for this meeting; and the meeting is open to all MARPA members.
Congress has passed a deal averting the fiscal cliff (at least for now); but this is a tax bill and tax bills are rarely simple.
This tax bill is more than merely an agreement setting tax rates; it includes numerous authorizations and reauthorizations that affect a wide variety of people and businesses. Some of our favorite tax deductions were scheduled to ‘go over the cliff’ and this bill reauthorizes them.
So what are the clauses that are most likely to affect the MARPA Community? Here are a few:
The bill also delays the effect of sequestration, which may provide some relief to those supporting defense contracts, but is also expected to foster continued uncertainty about those contracts.
As always, this article is meant to provide some ideas about what tax options may be available, but it is not meant to reflect tax advice. For specific tax advice, you should consult with your tax attorney or accountant.
The MARPA 2012 Conference will be held in a month, on October 3-5, 2012 at the Renaissance Las Vegas Hotel. But the deadline for making hotel reservations at the discounted rate is Monday, September 3!
We have negotiated a room rate of $129.00 per night (not including taxes) for single/double occupancy. This rate applies on a limited basis for rooms up to three days before and after the event, for those who wish to extend their stay. This is the lowest rate available to any group at the Conference Hotel during this time period! In order to qualify for this special rate, you must book your room by Monday, September 3, 2012. Click here for a link to the hotel for the MARPA room block. Clicking this link should automatically reference the 2012 MARPA discount code (which is mrpmrpa).
You can also call the hotel directly at (800) 750-0980. Make sure to ask for the “MARPA” rate in order to get our discounted rate!
The MARPA 2012 Conference will be held October 3-5, 2012 at the Renaissance Las Vegas Hotel. Please make your reservations early for the Conference: the hotel has sold out early for the past several years and we expect the hotel to sell out again this year.
We have negotiated a room rate of $129.00 per night (not including taxes) for single/double occupancy. This rate applies on a limited basis for rooms up to three days before and after the event, for those who wish to extend their stay. This is the lowest rate available to any group at the Conference Hotel during this time period!
In order to qualify for this special rate, you must book your room by Monday, September 3, 2012. Click here for a link to the hotel for the MARPA room block. Clicking this link should automatically reference the 2012 MARPA discount code (which is mrpmrpa).
You can also call the hotel directly at (800) 750-0980. Make sure to ask for the “MARPA” rate in order to get our discounted rate!
The IRS has issued new tax guidance that affects parts, materials and supplies. Some of these regulations will affect PMA parts manufacturers, while other will affect their customers (and may affect their future buying patterns).
The new guidance has been issued in the form of Temporary Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property. This temporary guidance become effective on January 1. At the same time, the IRS issued a proposal to make that temporary guidance permanent. The proposal provides the public with the opportunity to comment on the rules before they become permanent.
These new rules are meant to help companies distinguish between expenses and capital expenditures related to property. It also provides guidance on depreciating materials and supplies (guidance that may change the tax treatment of some inventory held by your customers). PMA manufacturers may find themselves affected by several elements of this rule, including guidance distinguishing “materials and supplies” from inventory, as well as new guidance for the tax treatment of rotable parts.
One purpose of the new (proposed) regulations is to clarify that if an expenditure merely restores the property to the state it was in before the work (like a repair), then situation prompting the expenditure arose and does not make the property more valuable, more useful, or longer lived, then such an expenditure is usually considered a deductible repair. In contrast, a capital expenditure is generally considered to be a more permanent increment in the longevity, utility, or worth of the property.
The new rules also address the tax treatment of materials and supplies. They clarify that the costs of acquiring or producing units of tangible property are required to be capitalized. This means that if a company purchases and /or produces goods for resale, the amount paid to acquire or produce those goods must be capitalized. So if you are supplying a manufacturer, the manufacturer may not deduct the cost of the inventory that goes into the final product until the product is actually sold. This provides a firm tax basis for just-in-time manufacturing and discourages manufacturers from carrying a substantial raw materials or parts inventory.
The new rule also clarifies that an exception exists for materials and supplies that are not considered inventory. Amounts paid for such materials and supplies are deductible in the year in which the goods are used in your company’s operations. However, incidental materials and supplies for which no records of consumption, or for which beginning and end of year inventories are not taken, may be deducted in the year in which they are purchased (yes, this will provide a tax inventive to avoid keeping metrics on items, but the value of tracking such materials usually exceeds the tax inventive to not track them). In all cases, the materials and supplies do not need to be capitalized into the value of the larger items on which the materials and supplies are used.
The formal definition of materials and supplies is:
Definitions—(1) Materials and supplies. For purposes of this section, materials and supplies means tangible property that is used or consumed in the taxpayer’s operations that is not inventory and that—
(i) Is a component acquired to maintain, repair, or improve a unit of tangible property (as determined under § 1.263(a)–3T(e)) owned, leased, or serviced by the taxpayer and that is not acquired as part of any single unit of tangible property;
(ii) Consists of fuel, lubricants, water, and similar items, that are reasonably expected to be consumed in 12 months or less, beginning when used in taxpayer’s operations;
(iii) Is a unit of property as determined under § 1.263(a)–3T(e) that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations;
(iv) Is a unit of property as determined under § 1.263(a)-3T(e) that has an acquisition cost or production cost (as determined under section 263A) of $100 or less (or other amount as identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter)); or
(v) Is identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) as materials and supplies for which treatment is permitted under this section.
Finally, the guidance specifies that rotable and temporary spare parts are used or consumed in the taxpayer’s operations in the taxable year in which the taxpayer disposes of the parts. This new guidance may drive some interesting recordkeeping among air carriers that carry rotable inventory. Under this new rule, there is a distinct tax advantage to being able to show that you are using rotables in the year purchased (so they can be treated as ordinary and necessary business expenses in the year that they are purchased). This may encourage air carriers to keep fewer rotables in their inventories, relying more heavily on distributors to provide rotables on a just-in-time basis.
The new rule defines rotables as:
“rotable spare parts are materials and supplies under paragraph (c)(1)(i) of this section that are acquired for installation on a unit of property, removable from that unit of property, generally repaired or improved, and either reinstalled on the same or other property or stored for later installation”
The new rule provides three different examples of the tax treatment of rotables under the new rule. Examining these examples provides an interesting view of the future tax treatment of rotables. [note that we have skipped example one from the IRS publication].
Example 2. Rotable spare parts. X operates a fleet of specialized vehicles that it uses in its service business. Assume that each vehicle is a unit of property under § 1.263(a)–3T(e). At the time that it acquires a new type of vehicle, X also acquires a substantial number of rotable spare parts that it will keep on hand to quickly replace similar parts in X’s vehicles as those parts break down or wear out. These rotable parts are removable from the vehicles and are repaired so that they can be reinstalled on the same or similar
vehicles. X does not use the optional method of accounting for rotable and temporary spare
parts provided in paragraph (e) of this section. In Year 1, X acquires several vehicles
and a number of rotable spare parts to be used as replacement parts in these vehicles.
In Year 2, X repairs several vehicles by using these rotable spare parts to replace worn or
damaged parts. In Year 3, X removes these rotable spare parts from its vehicles, repairs
the parts, and reinstalls them on other similar vehicles. In Year 5, X can no longer use the
rotable parts it acquired in Year 1 and disposes of them as scrap. Under paragraph
(c)(1)(i) of this section, the rotable spare parts acquired in Year 1 are materials and
supplies. Under paragraph (a)(3) of this section, rotable spare parts are generally used
or consumed in the taxable year in which the taxpayer disposes of the parts. Therefore,
under paragraph (a)(1) of this section, the amounts that X paid for the rotable spare parts in Year 1 are deductible in Year 5, the taxable year in which X disposes of the parts.
Example 3. Rotable spare parts; application of optional method of accounting. Assume the same facts as in
Example 2, except X uses the optional method of accounting for all its rotable and temporary spare parts under paragraph (e) of this section. In Year 1, X acquires several vehicles and a number of rotable spare parts (the ‘‘Year 1 rotables’’) to be used as replacement parts in these vehicles. In Year 2, X repairs several vehicles and uses the Year 1 rotables to replace worn or damaged parts. In Year 3, X pays amounts to remove these Year 1 rotables from its vehicles. In Year 4, X pays amounts to maintain, repair, or improve the Year 1 rotables. In Year 5, X pays amounts to reinstall the Year 1 rotables on other similar vehicles. In Year 8, X removes the Year 1 rotables from these vehicles and stores these parts for possible later use. In Year 9, X disposes of the Year 1 rotables. Under paragraph (e) of this section, X must deduct the amounts paid to
acquire and install the Year 1 rotables in Year 2, the taxable year in which the rotable spare parts are first installed by X in X’s vehicles. In Year 3, when X removes the Year 1 rotables from its vehicles, X must include in its gross income the fair market value of each part. Also, in Year 3, X must include in the basis of each Year 1 rotable the fair market value of the rotable and the amount paid to remove the rotable from the vehicle. In Year 4, X must include in the basis of each Year 1 rotable the amounts paid to maintain, repair, or improve each rotable. In Year 5, the year that X reinstalls the Year 1 rotables (as repaired or improved) in other vehicles, X must deduct the reinstallation costs and the amounts previously included in the basis of each part. In Year 8, the year that X removes the Year 1 rotables from the vehicles, X must include in income the fair market value of each rotable part removed. In addition, in Year 8, X must include in the basis of each
part the fair market value of that part and the amount paid to remove the each rotable from the vehicle. In Year 9, the year that X disposes of the Year 1 rotables, X may deduct the amounts remaining in the basis of each rotable.
Example 4.′ Rotable part acquired as part of a single unit of property; not material or supply. X operates a fleet of aircraft. In Year 1, X acquires a new aircraft, which includes two new aircraft engines. The aircraft costs $500,000 and has an economic useful life of more than 12 months, beginning when it is placed in service. In Year 5, after the aircraft is operated for several years in X’s business, X removes the engines from the aircraft, repairs or improves the engines, and either reinstalls the engines on a similar aircraft or stores the engines for later reinstallation. Assume the aircraft purchased in Year 1, including its two engines, is a unit of property under § 1.263(a)–3T(e). Because the engines were acquired as part of the aircraft, a single unit of property, the engines are not materials or supplies under paragraph (c)(1)(i) of this section nor rotable or temporary spare parts under paragraph (c)(2) of this section. Accordingly, X may not apply the rules of this section to the aircraft engines upon the original acquisition of the aircraft nor after the removal of the engines from the aircraft for use in the same or similar aircraft. Rather, X must apply the rules under §§ 1.263(a)–2T and 1.263(a)–3T to the aircraft, including its engines, to determine the treatment of amounts paid to acquire, produce, or improve the unit of property.
The temporary regulations can be found online here:
The purpose of the temporary regulations is to implement the rule immediately before going through notice and comment.
The permanent version of the regulation is subject to notice and comment. The proposed permanent rule can be found online here:
Comments on whether these temporary rules should be made permanent, and how they should be changed, are due by March 26, 2012.
Under the Patient Protection and Affordable Care Act of 2010,employers will have to add information to W-2 Forms to report the amount that the employer has paid for employee health insurance coverage.
Employer’s health insurance payments will have to be reported on the W-2 Forms starting in January 2013 (for 2012 wages). This means that affected employers should start now to ensure that their wage systems accurately track this information.
There is a temporary exception for businesses with fewer than 250 employees. The temporary exception was established through the IRS interim guidance (a notice entitled “Interim Guidance on Informational Reporting to Employees of the Cost of Their Group Health Insurance Coverage”). It is not a statutory exception.
The temporary exception is expected to expire in January 2014, giving smaller businesses an extra year to come into compliance.
Further details are available through:
At the MARPA Conference, Kevin Cox of LarsenAllen mentioned IC-DISCs as a way to minimize federal taxes on profits from exports. After his presentation, I asked if his organization could provide us with more information, because this seemed like a useful structure for MARPA members performing significant exports. In response, his colleague Steve Roark wrote us the following article describing the IC-DISC and the way that a US exporter can use an IC-DISC to reduce its tax obligation. Contact information for LarsenAllen is at the bottom of the article.
Manufacturers and distributors work hard to provide products and services competitive in the global economy. Now more than ever, generating foreign sales is a necessary component to growth. Competition for export sales is burdened by many factors including foreign competition, tariffs, fees, foreign taxes and so forth. Wouldn’t it be great if companies could get a break from this burden? The rallying cry by many companies is that Congress needs to act now to allow U.S. manufacturers to be more competitive in the global market. Well, Congress did act – they just acted about 30 years ago. Years ago, congress recognized the growing disparity in global competition and provided a way to help compete on a level footing in the face of these burdensome requirements. The vehicle to do this is through the tax strategy called an IC-DISC.
Organizations that have export sales can significantly reduce their Federal tax by creating an Interest Charge-Domestic International Sales Corporation (IC-DISC). It’s a long name, but the concept is quite simple. By creating a separate entity, a domestic organization with international sales can defer and/or reduce their overall tax burden related to the income on these international sales.
The IC-DISC reduces U.S. taxation on exports of property originating in the United States for direct use outside the U.S. There are two types of sales that qualify. The first is for products shipped directly outside of the U.S. The second is for products sold in the U.S. that ultimately are added to a product that is shipped internationally. Many contract manufacturers and distributors are part of a supply chain that serves large OEM’s whose products end up outside the U.S. Parts shipped domestically to these OEM’s may also qualify for this tax advantaged status, even though on the surface they aren’t what you think of as foreign sales.
An IC-DISC can be used in a number of ways. Some of the advantages and benefits provided by an IC-DISC include:
• Permanent tax savings on export sales. Although an IC-DISC is a tax exempt entity, any cash distributed out of an IC-DISC is taxed to the shareholders at the capital gains rate of 15 percent. This results in up to a 20% savings on Federal taxes on the income associated with foreign sales.
• Tax deferral on export sales. An IC-DISC also allows a company to defer up to $10 million dollars of taxable income to the future. This can be a significant benefit if cash flow is tight, or if you are a proponent of deferring the payment of tax to Uncle Sam.
• Means to facilitate succession planning. An IC-DISC offers a number of capabilities for executing a succession plan. An important feature of the IC-DISC is that shareholders can be corporations, retirement accounts, individuals or a combination thereof. This can result in an effective means to distribute cash to beneficiaries in a tax-advantaged manner.
It doesn’t take much for a company to benefit from an IC-DISC. Companies with as little as $500,000 of export sales have shown savings from establishing an IC-DISC. In addition, the set-up and recurring maintenance of this strategy is relatively minimal compared to the savings.
IC-DISC’s have been around for close to 30 years, yet they are not widely used in small to mid-sized organizations – why is that?
One reason is the misconception that they are too complicated or administratively burdensome. An IC-DISC strategy does require a company to establish a separate entity to report these international sales. The IC-DISC is a “paper” entity created to make the company more competitive. It does not require corporate substance or form, office space, employees, or tangible assets. It simply serves as a conduit for export tax savings. Customers do not need to know about the IC-DISC, and contracts remain as they are today. In addition, the transactions required to be reported in the IC-DISC can be summarized and reported once a year.
Another reason is that in the past this structure didn’t provide much benefit. There were other provisions in the tax code that provided deductions for international sales. These provisions expired a number of years ago resulting in the IC-DISC strategy once again becoming more advantageous.
If you think this strategy may be an option for your company, it is important to act quickly. An IC-DISC is only allowed to provide benefit beginning on the date the IC-DISC is formed (benefits are not available retroactively). The sooner a taxpayer creates an IC-DISC entity the greater their benefits will be.
To maximize savings and ensure proper IC-DISC formation and administration, businesses that wish to create an IC-DISC should seek assistance from a qualified tax advisor. While the concept and administration are relatively simple, it is important that the initial set-up is done properly to maximize and protect this tax advantage status.
About the Author: Steve Roark is a Manager in the Manufacturing and Distribution group of LarsonAllen. Steve can be reached at 888.529.2648 or email@example.com. To learn more about LarsonAllen, visit www.larsonallen.com.